Here's How Much New G7 Tax Proposals Could Hurt FANG Stocks

Over the weekend, finance ministers from G7 economies agreed to new global tax policies that could potentially have a major impact on big tech stocks.

What Happened: G7 members Canada, France, Germany, Italy, Japan, the United Kingdom and the United States pledged to enforce a minimum global corporate tax rate of at least 15%.

In addition, they committed to ensuring taxes are paid in the countries in which revenues are generated, potentially eliminating the transfer of profits to tax shelters like Ireland.

Why It’s Important: Bank of America analyst Justin Post said the new framework could potentially eliminate digital services taxes in the Eurozone, such as the 3% tax in France.

For reference, Post said he estimates 2021 GAAP tax rates of 19% for Amazon.com, Inc. AMZN, 18% for Facebook, Inc. FB, 16% for Alphabet, Inc. GOOG GOOGL and 16% for Netflix, Inc. NFLX.

Post said the FANG group generates about half its revenues and profits outside of the U.S. Current international tax rates are in the 10% to 14% range, while the U.S. corporate tax rate stands at 21%. He said the new G7 deal could raise the average international tax rate on the FANG stocks by about 2%, which would translate to an average 2.4% negative impact on GAAP EPS.

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Post said new tax policies could take a bite out of FANG earnings, but it could also eliminate some of the regulatory uncertainty that has been weighing on big tech valuations.

“We think there is a reasonable probability of average tax rates for FANGs increasing by 4 points from new US (assuming US corporate rates move to 25%) and International tax legislation,which would result in 5% lower average EPS, but changes will likely take a few years and we would anticipate some new tax optimization strategies that could offset some of the impact,” he wrote in a note.

Benzinga’s Take: Post said a worst-case scenario could see FANG tax rates in Europe roughly doubling from a range of between 10% and 14% to a new range of between 20% and 31%. However, the potential negative impact of tax policy changes on FANG stock prices will depend on just how high tax rates rise, how much FANG stocks can adjust their models to counter the tax hikes and how much the clarification on tax policy could trigger relief rallies in the stocks.